DBRS Initiates Ratings Coverage on KBC Group N.V. at A, Stable Trend

DBRS has today initiated coverage on KBC Group N.V. (KBC or the Group). DBRS has assigned an Issuer Rating of “A” to KBC with an “A” Senior Long-Term Debt & Deposits rating and an R-1 (middle) Short-Term Debt & Deposits rating. DBRS has also assigned ratings to KBC’s principal banking subsidiary, KBC Bank, N.V. (KBC Bank), including a rating of A (high) for its Senior Long-Term Debt & Deposits and a rating of R-1 (middle) for its Short-Term Debt & Deposits. The trend for all ratings is Stable.

These ratings reflect the Group’s strong bancassurance franchise in Belgium, its solid positioning with franchises in key countries in Central and Eastern Europe (CEE) and its substantial wholesale banking capabilities. This profile is incorporated into DBRS’s intrinsic assessments (IA) of A (low) for the Group and “A” for KBC Bank. The Stable trend takes into account DBRS’s assessment of the strength of the Group’s core franchises, its positive earnings, its improving financial profile and its strengthened capitalisation that has benefited from government capital injections and other support. The ratings and the Stable trend also consider DBRS’s expectation of some form of timely systemic support for KBC as one of the largest banking organisations in Belgium in the event of a highly stressed scenario. This determination elevates the long-term final ratings by one notch over the IAs.

KBC is the parent company for KBC Bank, KBC Insurance and KBL EPB, its private bank. The one notch differential in the long-term ratings between the parent company and its principal operating business, KBC Bank, is standard under DBRS’s methodology. This one notch differential recognises the additional risk for debt issued by the parent from the potential interruption of dividends from the Group’s operating businesses and other adverse events for the parent company that could result from regulatory pressure to bolster the bank should it come under stress. While DBRS recognises the benefit to the parent company’s position from the diversification of dividend earnings from its insurance and banking subsidiaries, KBC’s strong bancassurance franchise results in a strong correlation in the prospects of KBC Bank and KBC Insurance.

Despite three quarters of negative earnings from 3Q08-1Q09 and residual stress from legacy assets, KBC’s franchise remains resilient in DBRS’s view. With several large competitors also struggling with the impact of the crisis, KBC has retained its strong position in its domestic market. As one of the three largest banks in Belgium, the Group is well-positioned in its domestic markets, particularly in Flanders, which is a prosperous region of Belgium, its home country. KBC has a strong reputation in retail banking and is particularly good at cross-selling banking, insurance and asset management products that are at the core of KBC’s successful bancassurance model. Adding an increasingly important dimension to KBC’s prospects is its international retail banking franchises in Central and Eastern Europe, which have also coped reasonably well with the stresses of the current economic downturn in markets where the Group is well established.

With positive earnings over four consecutive quarters, risk reduction actions and government support, the Group’s financial profile has been improving since the middle of 2009, providing support for the current ratings. After building up substantial exposures that were peripheral to its core franchise, the Group is focusing its wholesale banking activities on serving its core franchises. As a result of outsized losses from these exposures, KBC needed to be recapitalised. It received capital injections in December 2008 from the Belgian State and July 2009 from the Flemish region that totaled EUR 7 billion, or 45% of Tier 1 capital as of 31 December 2009. Under KBC’s restructuring plan, the Group intends to repay government capital by 2013. Additionally, to reduce market concerns about the extent of KBC’s exposure to legacy assets from the crisis, KBC was provided with a State guarantee which mitigates the risk on EUR 20 billion of CDO-linked exposures, subject to certain first-loss provisions and loss-sharing arrangements.

DBRS views positively the restructuring plan that the Group is now pursuing, given that the plan retains the strengths of KBC’s franchises, while lowering the Group’s risk profile. Under this business plan, which has been approved by the European Commission, KBC is positioning itself as a European regional player with a business model that is focused on direct and service-oriented relationships with its customer base. A key priority is to build on existing bancassurance platforms within Belgium and five core countries in Central and Eastern Europe, targeting local retail and small businesses and middle market customers (SMEs), including local mid-caps. KBC’s core business geographies are Belgium, the Czech Republic, Slovakia, Hungary, Poland and Bulgaria. As a universal bank, KBC’s wholesale banking capabilities provide it with significant opportunities to generate solid earnings by leveraging its well-positioned customer franchises and take advantage of synergies with its banking and insurance operations.

The Stable trend considers the resilient strength of KBC’s core franchise and its ability to generate earnings to cope with elevated credit costs and legacy assets. Success with its restructuring plan is essential in this process. While the Group’s core franchises have coped with the disruptions of the last two to three years, the extent of the actions under the plan could disrupt the operations of its business units and constrain the earnings that they can generate. In seeking to reduce risk across the Group, KBC faces the challenge of not overly constraining its businesses and earnings power. Across its franchises, KBC has faced major competitors that have also been disrupted. As these competitors also restore their competitive abilities, the Group is facing a more competitive environment that will make achieving earnings growth more challenging. DBRS views KBC’s CEE franchises as providing significant growth opportunities for the Group, but in the near-term KBC must cope with the stress in these economies and the potential for further disruptions.

DBRS has designated KBC as a Critically Important Banking Organisation (CIB) in Belgium given its extensive involvement in the country’s financial markets and its crucial role in the flow of financial transactions. In particular, this designation for KBC results in the parent’s short-term rating being raised by one-notch to R-1 (middle), the floor level for CIBs, to reflect the implicit level of support that would maintain KBC’s active participation in Belgum’s short-term financial markets. DBRS has established the floor for CIBs in Belgium at A (high) / R-1 (middle) at the bank level and “A” / R-1 (middle) at the parent company level. DBRS views these rating floors as the level of creditworthiness that market participants demand for CIBs to be viewed as reliable counterparties in undertaking a wide range of financial transactions. DBRS expects that the Belgian government would provide support, if necessary, to prevent any CIB from weakening below this rating level to ensure that its financial system remains fully functioning. As a consequence, the trend on these floor ratings is Stable. DBRS’s expectation of systemic support for KBC has been confirmed by the actions of the Belgian national government and the Flemish regional government through recent capital injections. This timely systemic support in case of need underpins an SA2 Support Assessment.

Notes:
All figures are in EUR unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.